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Investor behavior in the mutual fund industry: evidence from gross flows

Author

Listed:
  • George Cashman
  • Federico Nardari
  • Daniel Deli
  • Sriram Villupuram
Abstract
Using a large sample of monthly gross flows from 1997 to 2003, we uncover several previously undocumented regularities in investor behavior. First, investor purchases and sales produce fund-level gross flows that are highly persistent. Persistence in fund flows dominates performance as a predictor of future fund flows. More importantly, failing to account for flow persistence leads to incorrect inferences with respect to the relation between performance and flows. Second, we document that investors react differently to performance depending on the type of fund, and that investor trading activity produces meaningful differences in the persistence of fund flows across mutual fund types. Third, at least some investors appear to evaluate and respond to mutual fund performance over much shorter time spans than previously assessed. Additionally, we document differences in the speed and magnitude of investors’ purchase and sales responses to performance. Copyright Springer Science+Business Media, LLC 2014

Suggested Citation

  • George Cashman & Federico Nardari & Daniel Deli & Sriram Villupuram, 2014. "Investor behavior in the mutual fund industry: evidence from gross flows," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 38(4), pages 541-567, October.
    • Handle: RePEc:spr:jecfin:v:38:y:2014:i:4:p:541-567
    DOI: 10.1007/s12197-012-9231-1
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    Cited by:

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    2. Ramiro Losada, 2022. "Periodic public information on investment funds and how it influences investors´ decisions," CNMV Working Papers CNMV Working Papers no. 7, CNMV- Spanish Securities Markets Commission - Research and Statistics Department.
    3. Naumer, Hans-Jörg, 2023. "TV media sentiment, mutual fund flows and portfolio choice: They do not put their money where their sentiment is," Research in International Business and Finance, Elsevier, vol. 66(C).
    4. Galla Salganik-Shoshan, 2016. "Investment flows: Retail versus institutional mutual funds," Journal of Asset Management, Palgrave Macmillan, vol. 17(1), pages 34-44, January.
    5. Martin Rohleder & Dominik Schulte & Marco Wilkens, 2017. "Management of flow risk in mutual funds," Review of Quantitative Finance and Accounting, Springer, vol. 48(1), pages 31-56, January.
    6. Agapova, Anna & Kaprielyan, Margarita, 2023. "Diversification measures: Mutual fund family case," International Review of Financial Analysis, Elsevier, vol. 90(C).
    7. Thierry Roncalli & Fatma Karray-Meziou & Franc{c}ois Pan & Margaux Regnault, 2021. "Liquidity Stress Testing in Asset Management -- Part 1. Modeling the Liability Liquidity Risk," Papers 2101.02110, arXiv.org.
    8. Muñoz, Fernando & Vargas, María & Vicente, Ruth, 2014. "Fund flow bias in market timing skill. Evidence of the clientele effect," International Review of Economics & Finance, Elsevier, vol. 33(C), pages 257-269.
    9. Xiao-hong Chen & Fu-jing Jin & Qun Zhang & Li Yang, 2016. "Are investors rational or perceptual in P2P lending?," Information Systems and e-Business Management, Springer, vol. 14(4), pages 921-944, November.
    10. Flávia Januzzi & Aureliano Bressan & Fernando Moreira, 2020. "Opacity, Risk, Performance and Inflows in Hedge Funds," RAC - Revista de Administração Contemporânea (Journal of Contemporary Administration), ANPAD - Associação Nacional de Pós-Graduação e Pesquisa em Administração, vol. 24(1), pages 77-99.
    11. Lorne N. Switzer & Jun Wang & Seungho Lee, 2017. "Extreme risk and small investor behavior in developed markets," Journal of Asset Management, Palgrave Macmillan, vol. 18(6), pages 457-475, October.
    12. Alexander Schiller & René-Ojas Woltering & Steffen Sebastian, 2020. "Is the flow-performance relationship really convex? - The impact of data treatment and model specification," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 44(2), pages 300-320, April.
    13. Florian Röder & Andreas Walter, 2019. "What Drives Investment Flows Into Social Trading Portfolios?," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 42(2), pages 383-411, July.
    14. Martin Rohleder, 2015. "The Relation between Past Flows and Future Performance: Simple Investment Strategies in the Mutual Fund Sector," IJFS, MDPI, vol. 3(1), pages 1-28, February.

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    More about this item

    Keywords

    Mutual Funds; Performance Flow Relation; Mutual Fund Flows; G23; L14;
    All these keywords.

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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